Mortgage modifications come up short

WASHINGTON — Jose Palomo was surprised when the knock on the door came in August, informing him that his California home had been foreclosed and he'd need to vacate promptly. After all, he'd recently started payments on an in-house mortgage modification with CitiMortgage Inc.

"I was speechless, didn't know what to say. What's going on? Why? They got our hopes high saying we got approved; everything was going to go through," recalled Palomo, 23, a car salesman fighting to keep his small home in Riverside.

Palomo's plight illustrates why housing remains such a drag against U.S. economic recovery. He's fighting to keep a 738-square-foot home that today is worth less than $85,000. He was given a mortgage modification where he'll owe about twice that amount — illustrating how such modifications often fail to solve the problem they're designed to fix.

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And to top it off, even as he began making payments on his still too-high mortgage, Palomo still faced losing his home — underscoring lenders' relentless pursuit of foreclosure proceedings four years after the housing-market bust.

Today there are at least 4.2 million homeowners who, like Palomo, are late on their mortgage payments or somewhere in the delinquency and foreclosure process. The first wave of foreclosures came during the 2008 financial crisis as subprime mortgages given to weak borrowers imploded. Now the subsequent economic downturn and high unemployment keep housing depressed.

Those conditions are even more pronounced in the Northern San Joaquin Valley, which saw housing prices tumble when the bubble burst nearly six years ago. As prices took a nosedive, homeowners found themselves with properties they owed far more on than they were worth — putting them underwater or upside down.With so many homeowners in that predicament, their only way out was to sell, but the market was flooded with properties and prices were slashed in an effort to move them.

Homeowners with subprime loans, a popular financing tool in the valley, found it tough to keep up with rising payments and couldn't refinance to fixed-rate mortgages because falling prices wiped out any equity they had. The valley quickly became one of the worst region's in the nation based on the number of foreclosures.Today, the housing prices remain depressed, foreclosures continue and new construction is very limited. The staggering job losses caused by the housing market decline and tough recession, continue to plague the region with about 16 percent unemployment in August — the worst the valley has seen in more than a decade.

'Still woefully inadequate'

The administrations of George W. Bush and Barack Obama both offered incentives for lenders to help homeowners modify their mortgages. Those efforts haven't achieved much.And four years into the housing crisis, banks and their bill collectors, known as mortgage servicers, are still under fire for their response to troubled borrowers.

"I would say they are somewhat better than they were three years ago, but still woefully inadequate to meet the demand, given the still remarkably high levels of distressed borrowers they are attempting to deal with," said Paul Leonard, director of the California office of the Center for Responsible Lending, a Durham, N.C.-based advocacy group.

From December 2009 through June, more than 1.6 million government-backed mortgage modifications had been started, but only 791,000 became permanent. These numbers remain well below the goal of 4 million modifications that the Obama administration set for itself.

Glass half full?

Still, Faith Schwartz sees the glass as half full. She heads HOPE NOW, an association that represents both investors in mortgage bonds and mortgage servicers. Schwartz points to a growing number of proprietary mortgage modifications outside the government's program, which has more strings attached on lenders."I think they are getting better," said Schwartz, adding that through August there had been 690,000 permanent loan modifications in 2011. About 478,000 of those are proprietary, separate from the government's program.

Another reason for optimism, she said, is that the number of modifications now outpaces the number of foreclosures.

"It's a good sign," Schwartz said. There's also been an increase in short sales, where the bank forgives some of what's owed if the homeowner is able to sell the property, she said.

This year, the Treasury Department began grading mortgage servicers. On Sept. 1, it determined that, based on performance during the first six months of 2011, Bank of America and JPMorgan Chase needed serious improvement. Government payments for mortgage modifications were withheld from these banks. CitiMortgage escaped that fate but was found to be in need of moderate improvement.

George Bosch is decidedly unimpressed. The legal administrator for the law offices of Edward Lopez and Rick Gaxiola in Los Angeles, which represents Palomo for free, said mortgage servicers remain disorganized and dysfunctional.

"They're still out of touch about the reality of how people are being affected. The banks are insensitive," he said.

Palomo's case is also illustrative of much that went wrong during the housing boom. He's all too typical of millions of unqualified borrowers who got loans they couldn't afford from unscrupulous lenders.

Palomo was just 18 when a mortgage broker got him a subprime loan through disgraced lender Countrywide. At the time he was a trainee in Riverside's municipal government, but he was laid off in the downturn. He went back to school but had to quit to keep his unemployment benefits.

Bosch and CitiMortgage agree that Palomo was approved in July for a modification, his second, and that acceptance documents were completed. They differ on whether CitiMortgage lost his initial payment or whether it was never received, as CitiMortgage claims. Lacking that payment, Palomo's home went unusually fast into foreclosure sale.

Facing eviction

Palomo learned he'd been foreclosed when he answered the door to find someone from a company trying to represent, for a fee, homeowners facing eviction. There was no paperwork and no phone call from CitiMortgage, Palomo insisted.

"The only thing he got was a knock on the door saying your house has been sold," Bosch said. His pressure led CitiMortgage to rescind the foreclosure sale and restate the mortgage modification offer.Mark Rodgers, a Citi spokesman, said attempts were made to reach Palomo. He suggested the lesson for homeowners in trouble is to remain in contact with servicers while working through solutions."We are pleased to have resolved this matter quickly," said Rodgers.

Bosch doesn't think the modification offered by CitiMortgage is a real solution, since the house is worth so much less than the nearly $175,000 Palomo now owes on it. His monthly payment has gone down by about $265 a month, but more than $26,000 has been added to the loan balance.

"Without principal reductions, people are going to walk away. It's just a Band-Aid," said Bosch. He fears that many owners such as Palomo may hand back the keys if home values don't rise significantly within five years. "It's just not a solution unless you're doing principal reductions."Benefits erased

Lenders and investors remain reluctant to write off loans. They prefer to lower monthly payments by converting a 30-year mortgage into a 40-year loan. Homeowners effectively end up renting from the bank since homes are worth so much less than the modified mortgages they carry. A borrower's break-even point can be a decade or more away.

"The benefits that are traditionally associated with home ownership, of building wealth, are not going to be coming anytime in the foreseeable future," said Leonard of the Center for Responsible Lending.

There've been a number of proposals over the past four years for programs in which either the bank forgives part of the loan, or the bank and taxpayers eat part of the loan in exchange for a modification that reflects current market prices. Some variations on these proposals — which haven't been tried in any widespread way — would have either the bank, or the bank and the government, sharing a portion of any profits that accrue when the home is later sold.

In a bid to boost modifications, beginning in October distressed mortgages owned or guaranteed by Freddie Mac will also be eligible for a new standard modification if they don't meet the requirements of the government's Home Affordable Mortgage Program. The modifications would try to shave at least 10 percent off a monthly mortgage payment by stretching a mortgage out as long as 40 years. This program is aimed at borrowers at least 60 days late.